The Canadian Central Bank left the key rate unchanged. The regulator said it would remain cautious, when considering further steps towards tightening monetary policy, as watches the economic impact of the more expensive Canadian dollar and higher interest rates. The key interest rate remains at 1%, after the previous two meetings (in July and September) were upgraded.
The Central Bank statement says the Canadian dollar is weighing on inflation and exports. There is also some labor market slowness, despite the strong performance of the economy as a whole.
“While the cash incentives will have to be reduced as time progresses, the board will be cautious about future interest rate adjustments”, said the Canadian Central Bank. “The bank will be guided by output data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity and the dynamics of wage growth and inflation”, adds the report.
After the surge in the Canadian dollar, the central bank is probably trying to curb expectations of a rapid rise in interest rates as the economy is closing its capacity. The currency appreciated by 9% since early May, and this is likely to slow down the 2% inflation target in the second half of 2018. It will also shrink the projected growth in exports, warns the central bank.
The regulator assumes that households are more sensitive to higher interest rates. According to central bankers, housing and consumption are slowing down due to regulatory changes and higher interest rates.
The statement also mentions a significant shift to protectionism, which is a major source of risk, especially with regard to the renegotiation of the North American Free Trade Agreement (NAFTA). Experts have already begun to take into account the uncertainty in making their forecast of growth. According to the central bank, uncertainty will wipe by 0.7 percentage points of investment growth and 0.2 percentage points of export growth in the period 2017-2018.
The Canadian Central Bank raises its forecast for economic growth this year and next from 2.8% to 3.1% and from 2% to 2.1%, respectively. The forecast for 2019 is down from 1.6% to 1.5%.